Share-Based Compensation Plans

The Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (the “2013 Plan”) and the Avon Products, Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which are shareholder-approved plans, provide for several types of share-based incentive compensation awards including stock options, restricted stock, restricted stock units and performance restricted stock units. Following shareholder approval of the 2016 Plan in May 2016, there were no further awards made under the 2013 Plan. Under the 2013 Plan, the maximum number of shares that may be awarded is 55,000,000 shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or stock appreciation right ("SAR"), by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by 3.13 multiplied by each share subject to such an award. Under the 2016 Plan, the maximum number of shares that may be awarded is 48,000,000 shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or SAR, by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by 2.4 multiplied by each share subject to such an award. Shares issued under share-based awards will be primarily funded with issuance of new shares.

We have issued stock options under the 2016 Plan, and restricted stock units and performance restricted stock units under the 2013 Plan and the 2016 Plan. We also have outstanding stock options under our prior shareholder-approved plans. Stock option awards are granted with an exercise price generally at a premium to the closing market price of our stock at the date of grant. Stock options generally vest in thirds over the three-year period following each option grant date and have ten-year contractual terms. Restricted stock units granted to Associates generally vest and settle after three years. Restricted stock units awarded to non-management directors vest in approximately one year and settle upon a director's departure from the Board of Directors. Performance restricted stock units generally vest after three years only upon the satisfaction of certain performance conditions.

For the years ended December 31:



	2018		2017		2016
Compensation cost for stock options, performance restricted stock units and restricted stock units	$	13.8	$	24.2	$	24.0
Total income tax benefit recognized for share-based arrangements	2.0		1.4		1.9

All of the compensation cost for stock options, performance restricted stock units and restricted stock units, including those that will be funded with treasury shares, for 2018, 2017 and 2016 was recorded in SG&A expenses in our Consolidated Statements of Operations.

Stock Options

During 2018, 2017 and 2016, we granted premium-priced stock options, in which the exercise price was equal to a 25% premium and 30% premium, respectively, from the closing market price of our stock price at the date of grant. The premium-priced stock options vest on a three-year graded vesting schedule. The fair value of each premium-priced stock option is estimated on the date of grant using a Monte-Carlo simulation. When estimating the fair value of each option, we used the following weighted-average assumptions for options granted during the years ended December 31, 2018, 2017 and 2016:



	2018	2017	2016
Risk-free rate⁽¹⁾	2.7%	2.1%	1.6%
Expected term⁽²⁾	7 years	7 years	7 years
Expected Avon volatility⁽³⁾	42%	41%	39%
Expected dividends	—%	—%	—%


(1)	The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.


(2)	The expected term of the option was based on the vesting terms of the respective option and a contractual life of 10 years.


(3)	Expected Avon volatility was based on the daily historical volatility of our stock price, over a period similar to the expected life of the option.

The weighted-average grant-date fair value per share of options granted were $1.04, $1.54 and $1.37 during 2018, 2017 and 2016, respectively.

A summary of stock options as of December 31, 2018, and changes during 2018, is as follows:



	Shares (in 000’s)	Weighted- Average Exercise Price		Weighted- Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2018	17,165	$	14.95
Granted	5,952	3.49
Exercised	—	—
Forfeited	1,082	5.82
Expired	3,073	34.27
Outstanding at December 31, 2018	18,962	$	9.05	6.4	$	—
Exercisable at December 31, 2018	8,679	$	14.05	4.1	$	—

We recognize expense on stock options using a graded vesting method, which recognizes the associated expense based on the timing of option vesting dates. At December 31, 2018, there was $6.1 of unrecognized compensation cost related to stock options outstanding. That cost is expected to be recognized over a weighted-average period of 1.8 years.

There were no stock options exercised during 2018, 2017 or 2016.

Restricted Stock Units and Performance Restricted Stock Units

During 2018, 2017 and 2016, we granted performance restricted stock units that would vest and settle after three years based on the relative total shareholder return of our common stock against companies included in the S&P 400 index as of the date of grant over a three year performance period ("2018 PRSUs", "2017 PRSUs" and "2016 PRSUs", respectively). The grant date fair value per share of these awards already reflects the estimated probability of achieving the market condition, and therefore we record the expense ratably over the performance period.

During 2015, we granted performance restricted stock units that would vest and settle after three years only upon the satisfaction of certain performance conditions over two years ("2015 PRSUs"). In addition, if the performance conditions are achieved above target, these performance restricted stock units are subject to a market condition in which the number of performance restricted stock units that vest will be limited to the target amount if the Company’s absolute total shareholder return during the three-year service period is negative. We have adjusted the compensation cost recognized to-date to reflect our performance, which reflects an estimated payout below target, and as such, the absolute total shareholder return market condition will not impact the number of performance restricted stock units that vest.

The fair value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was estimated on the date of grant using a Monte-Carlo simulation that estimates the fair value based on the Company's share price activity, expected term of the award, risk-free interest rate, expected dividends and the expected volatility of the stock of the Company. When estimating the fair value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and the 2015 PRSUs, we used the following weighted-average assumptions:



	2018 PRSUs	2017 PRSUs	2016 PRSUs	2015 PRSUs
Risk-free rate⁽¹⁾	2.5%	1.6%	1.1%	1.1%
Expected Avon volatility⁽²⁾	61.4%	61%	56%	38%
Expected average volatility⁽³⁾	29.5%	29%	28%	N/A
Expected dividends	—%	—%	—%	3%


(1)	The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the three year performance period, in effect at the time of grant.


(2)	Expected Avon volatility was based on the weekly historical volatility of our stock price, over a period similar to the three year performance period of the 2018 PRSUs, 2017 PRSUs and 2016 PRSUs and the three year service period of the 2016 PRSUs.


(3)	Expected average volatility was based on the weekly historical volatility of the stock prices of each member of companies included in the S&P 400 index as of the date of the grant, over a period similar to the three year performance period of the 2018 PRSUs. 2017 PRSUs and 2016 PRSUs.

The weighted-average grant-date fair value per share of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was $2.63, $4.52, $4.42 and $7.49 respectively.

A summary of restricted stock units at December 31, 2018, and changes during 2018, is as follows:



	Restricted Stock Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2018	4,804		$	5.26
Granted	2,433		2.61
Vested	(1,705	)	7.06
Forfeited	(534	)	4.45
December 31, 2018	4,998		$	3.37

A summary of performance restricted stock units at December 31, 2018, and changes during 2018, is as follows:



	Performance Restricted Stock Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2018⁽¹⁾	4,356		$	5.50
Granted	1,301		2.93
Vested	(986	)	7.49
Forfeited	(1,494	)	5.93
December 31, 2018⁽¹⁾	3,177		$	3.76

(1) Based on initial target payout.

The total fair value of restricted stock units and performance restricted stock units that vested during 2018 was $7.2, based upon market prices on the vesting dates. At December 31, 2018, there was $9.5 of unrecognized compensation cost related to these restricted stock units and performance restricted stock units compensation arrangements outstanding. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Later in 2015, we granted 1,123,183 performance restricted stock units that vested and settled in 2016 only upon the satisfaction of certain performance conditions through 2015. The terms of this award did not result in a fair value measurement date until 2016. During 2016 we recognized compensation cost of $2.0 for these performance restricted stock units. As this award vested and settled in 2016, no additional compensation cost was recognized in 2018 and 2017.

Restricted Stock Units and Performance Restricted Stock Units Funded With Treasury Shares

In March 2018, we granted 200,000 performance restricted stock units that will be funded with treasury shares, outside of the 2016 Plan, in reliance upon The New York Stock Exchange rules. These performance restricted stock units have a weighted-average grant-date fair value of $2.79 and would vest and settle after three years only upon the satisfaction of certain performance conditions over one year. During 2018, none of these performance restricted stock units vested, and 200,000 performance restricted stock units were outstanding at December 31, 2018. During 2018, we recognized compensation cost of $.1 for these performance restricted stock units. At December 31, 2018, there was $.4 unrecognized compensation cost related to these performance restricted stock units.

In February 2018 we granted 600,000 restricted stock units that will be funded from treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchange rules. The restricted stock units granted in February 2018 have a weighted-average grant-date fair value of $2.25 and vest and settle in full after three years. During 2018, none of these restricted stock units vested, and there were 600,000 restricted stock units outstanding at December 31, 2018. During 2018 we recognized compensation cost of $.4 for these restricted stock units. At December 31, 2018, there was $.9 unrecognized compensation cost related to these restricted stock units.

In March 2015, we granted 121,951 performance restricted stock units that will be funded with treasury shares, outside of the 2013 Plan, in reliance upon The New York Stock Exchange rules. These performance restricted stock units have a weighted-average grant-date fair value of $7.49 and the same terms exist for these awards as the 2015 PRSUs discussed above. During 2018, 121951 of these restricted stock units vested, and no performance restricted stock units were outstanding at December 31, 2018. During 2018, 2017 and 2016, we recognized compensation cost of $.0, $.1 and $.1, respectively, for these performance restricted stock units. At December 31, 2018, there was no unrecognized compensation cost related to these performance restricted stock units.

In March 2015 and April 2012, we granted 489,596 and 200,000 restricted stock units, respectively, that will be funded with treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchange rules. The restricted stock units granted in March 2015 have a weighted-average grant-date fair value of $9.00 and vest and settle ratably over three years. The restricted stock units granted in April 2012 had a weighted-average grant-date fair value of $21.69 and vested and settled ratably over five years. During 2018, 163,198 of these restricted stock units vested, and there were no restricted stock units were outstanding at December 31, 2018. During 2018, 2017 and 2016, we recognized compensation cost of $.1, $.8 and $1.7, respectively, for these restricted stock units. At December 31, 2018, there was no unrecognized compensation cost related to these restricted stock units as the awards had vested.